This points the way to the Fed’s announcement on its next dose of QE: they don’t know how much, but it’s going to be massive
Ever since an Ohio mortgagor successfully defended a bank action to repossess his property in 2008, on the grounds that the mortgagee only owned a fraction of the mortgage which had been diced and spliced on Wall Street between six different banks, Foreclosuregate was another disaster waiting to happen.
And this week it broke – in Ohio – when the state’s Attorney General threw down the rule book and said that too much of the bankers’ evidence on foreclosures was fraudulent and would lead to failure and fines. He cited Bank of America and GMAC, but they are all at it. A major spanner in the depressed real estate market is all that this market needed now.
And the knock-on effects will help grease the skids of Banking Crisis 2. Consider, many of the CDS wrappers and other derivatives were written for risks in this very market. Nobody knows the numbers or who is most at risk in this opaque market. The biggest derivatives player is JP Morgan: it has $78.7 trillion of derivatives, 35% of the total, or nearly 200 times its own share capital.
When the tide of Global Crunch went out, Jamie Dimon its much-acclaimed CEO, was perceived to be wearing the safest bathing suit on the Street, as he saved the modesty of the naked Bear Stearns and WaMu, but at a price. Pity if the elastic holding it all together, so nicely up to now, does go ping, but I wouldn’t bet a dime on it not happening soon. If you don’t want to see the result, look away now.
No wonder the Governor of the Bank of England was speaking in New York last week, urging the former colonials to split the casino banks away from the deposit banks, Glass-Steagall style. Unless America does this first, no one else can do it without losing competitiveness in the global financial marketplace. We are over two years into the crisis and still no effective action has been taken. Forget Basel III, said the Governor, as 'even the new levels of capital are insufficient to prevent another crisis'.
All of which points the way to the Fed’s announcement later this week on its next dose of QE: they don’t know how much, but it’s going to be massive, not that we’ll be told, because the Fed doesn’t know, nor does anyone else, and nobody wants any more bail-outs for banks, so we won’t learn how they’re going to do it either, and anyway the US is running a strong policy to devalue the dollar, so the more QE the better.
It’s enough to make a Chinese person squint so hard he won’t even see the $1.4 trillion blow-out of his US assets portfolio going flat. Why? Because no one’s going to be told how the next bout of QE is going to be administered, but it’s going to have to be used furtively for the most part to buy US residential mortgages from those bonus-ridden busted banks, yielding another dose of peeling clap-boards and broken rocking-chairs on the decks for the US-taxpayer.
And if you’re thinking how clever Gordon Brown was not to make the same error, well, I have news for you: he had already taken this false step with his Asset Protection Scheme (APS), which achieved the same effect, of lumbering the UK-taxpayer with the same worthless sort of clap, which is not even counted as a contingent part of the National Debt. Remember RBS’s APS figures? Answer: £281.9 billion of the stuff, of which 60% was overseas!
So what’s the moral of this tale of uncontrolled greed and excess? The more QE today, the more inflation tomorrow. As I have said before, the conspiracy of the central bankers that dare not speak its name is to inflate away the mountainous levels of debt of all types in an effort to avoid the Irving-Fisher debt-deflation syndrome, so that the bankers and their busted balance sheets and bogus bonuses can live to fleece the rest of us another day.
The stuff of civil strife and disorder, strikes and revolution is beginning to blow in the wind, and especially in the US and Euro-zone. Hang on to your gold.